Economic Survey says lack of exit norms costing Indian economy
Impediments to easy exit of lossmaking entities are costing the Indian economy in monetary and political terms, the Economic Survey 2015-16 warned, making a case for allowing quick closures.
The Survey, an annual exercise in detailing the health of the Indian economy just before the Union budget, noted that India has made much headway in removing barriers to the entry of firms, talent and technology into the Indian economy in the past two decades. But a tortuous exit process taints India's economic achievementsmaking it a transition from "socialism with limited entry to marketism without exit", said the Survey in a chapter titled 'The Chakravyuha Challenge of the Indian Economy'.
Chakravyuha is a war formation mentioned in the epic Mahabharata. In the climactic battle, the warrior Abhimanyu, who knows how to penetrate the formation, but not how to exit it, is trapped and killed. The "exit problem" arises due to "the three Is: interests, institutions, and ideas/ideology," the Survey said.
The reference is firstly to vested interests blocking reforms or exit plans. Secondly, weak institutions are unable to punish wilful defaulters, and if demonstrable wrongdoing goes unpunished, their legitimacy is called into question. On the other hand, in the case of entities like public sector banks, "it is well-known that senior managers are often reluctant to take decisions to write down loans for fear of being seen as favouring corporate interests and hence susceptible to scrutiny" by "strong" institutions like the investigative agencies, the Survey said.
"This encourages ever-greening of loans, postponing exit," it said. Lastly, there's the difficulty of phasing out entitlements in a democratic country with sizeable poverty and inequality, the Survey pointed out. Some measures to remedy the situation include the Narendra Modi-led government's new bankruptcy law and the rehabilitation of stalled projects that provide a significant boost to long-run efficiency and growth, the Survey said.
The centre hopes this law will improve the ranking of Asia's third largest economy in the World Bank's Ease of Doing Business index, where India is ranked 130 among 189 nations.
World Bank data shows that it takes more than four years to resolve an insolvency in India. The centre hopes to cut this time to less than a year. The Insolvency and Bankruptcy Code, 2015 was introduced by finance minister Arun Jaitley in the Lok Sabha on 21 December 2015. It has been referred to a joint committee of Parliament.
The bill provides for resolving corporate insolvency applications within 180 days, with an option of extending it by 90 days. It also has a clause to provide for insolvency professionals, who will specialize in helping sick firms.
The Survey listed the fertiliser sector, civil aviation, public sector banking, power distribution firms, central public sector enterprises, steel and some large infrastructure firms as areas most illustrative of the problem. "The lack of exit creates at least three types of costs: fiscal, economic (or opportunity) and political," it said.
In the case of fiscal costs, "exit is impeded often through government support of incumbent, mostly inefficient, firms". These costs mostly come in the form of explicit subsidies like bailouts or implicit ones like tariffs or loans from state-owned banks.
Economic losses result "from resources and factors of production not being employed in their most productive uses. In a capital-scarce country such as India, misallocation of resources can have significant costs," the Survey warned.
Another cost, in the current context, comes from the "overhang of stressed assets on corporate and bank balance sheets. It reflects the difficulty of apportioning costs of past mistakes between equity holders, creditors, taxpayers and consumers.
Chinese Premier Li Keqiang speaks in a video message to the G20 Finance Ministers and Central Bank Governors Meeting that opened.